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01/17/2011

Raising Public-College Tuition—Posner

A number of states are in quite desperate financial straits. They have huge debt, and like members of the eurozone, cannot lighten their debt load by inflating their currency or by improving their trade balance by devaluation. It is natural that they should be raising fees, such as college tuition. Whether this is the best way to reduce debt is a separate question, but probably an academic one; the pattern of revenue enhancement and cost reduction that a state embraces depends on the political balance in the state, rather than on what is efficient or otherwise in the public interest.

As Becker points out, there are external benefits to higher education. In the narrowest terms, college-educated persons (especially college graduates) have significantly higher incomes than the non-college-educated population, and those higher incomes generate higher tax revenues, which finance government expenditures that are used to finance government programs that largely benefit other people. The amount of the external benefits cannot actually be measured, however, because the decision to attend college is not random; generally, it is the intellectually abler who attend college, and their higher incomes are the combined result of their personal characteristics and the increased skills that college imparts to them. Nevertheless there is little doubt that college does generate external benefits, which creates a case for subsidy.

Whether it is a good case is a separate question. Because college contributes to higher earnings, which are not taxed until earned (that is, the asset, consisting of future expected earnings, that is obtained by attending college is not taxed), attending college is attractive to anyone who has sufficient intelligence and discipline to benefit from it, and he or she can borrow to finance tuition and living expenses.

In any event, there is no case at all from an overall social standpoint for subsidizing students who would pay full college tuition, without the inducement of a subsidy; the subsidy does not induce students to obtain a college education who otherwise would not because they could not afford to; it is a windfall to their families. Private colleges recognize this. They charge very high tuition (though not high enough to cover all their costs—but they have other sources of funds, such as alumni donations), but grant scholarships or loans to students whose families can’t afford the tuition. Charging low tuition to everyone, as public colleges do for residents of the state in which the college or university is located), does not make economic sense; it merely as I said provides windfalls to families willing and able to pay the full tuition. As Becker points out, this results in regressive redistribution of income, because families that can pay full tuition are wealthier than the average taxpayer, who pays for the costs of public colleges that tuition doesn’t cover.

This situation presents a case for a virtuous tax increase (raising a fee for a public service is the equivalent of a tax): the increase helps to close the state’s fiscal gap; the burden of the increased tax is borne entirely by the well-to-do; and some of the higher revenue can be used to subsidize students unable to afford the higher tuition.

There is still an argument against the tuition increase, which resembles the economic argument for the moratorium on increasing the federal income tax rate even on taxpayers who have very high incomes—even incomes of a million dollars or more a year (a proposal for eliminating the Bush tax cuts for those taxpayers was made by liberals but rejected by Congress). The argument is that any tax increase will reduce private spending (consumption and investment) unless the tax revenues are used to increase such spending; and given the still very shaky state of the U.S. economy, any measure that reduces such spending is suspect. Well-off families will have to allocate more of their income to their children’s education, and so will reduce their other spending. The revenue from the higher tuition will flow into the state’s coffers, but the question is whether the effect of that flow in stimulating investment and consumption will be greater than the decline in personal spending by persons paying the higher tuition. Conceivably, increasing tuition could retard economic recovery, though it is nevertheless a sensible long-term measure of fiscal reform because there is no reason to subsidize tuition of persons able and willing to pay it without subsidy.

I said earlier that the combination of tax (or fee) increases and spending cuts that states are adopting in an effort to alleviate their debt burden depends on the balance of politically effective interest groups. Well-to-do families will fight efforts to increase college tuition across the board. So of course will the state universities and other public colleges. Low tuition, made up for by public subsidies, helps state and city colleges and universities attract students who would otherwise go to private colleges and universities. Increasing tuition may increase state college revenues, assuming that demand is inelastic (meaning that the percentage fall in demand because of the higher price is less than the proportionate increase in price, so that revenue rises) within the range of the increase, but it will reduce the quality of the student body.

The proposed tuition increases raise the broader question whether states should be in the position of providing higher education, rather than leaving it to the market to private. In fact state universities have been weaning themselves from state support. At prestitgious public universities such as the University of Michigan, state subsidies now account for only about 10 percent of the university’s budget. The fact that a state legislature can raise state university tuition at will, or stated otherwise reduce subsidy at will, creates the kind of financial uncertainty that has brought English universities low. Universities supported by diverse financial sources are more stable, which is the main reason for the trend toward public universities’ seeking private support. The recession-driven tuition increases will accelerate this trend. That would be a good thing.

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The same argument could be made about elementary and secondary schools. Why subsidize those? Let those who can pay do so and the rest can go scratch.

Ah, but the argument is not very appealing when applied to children, who most believe have such education as a birthright, irrespective of their parents' finances.

I suggest we do better as a country to extend the birthright to advanced education and not expect the parents to pay directly. Let us recognize we are all the "parents" and spread the cost, much as we do with children's education.

It took me a few readings to get my head around this paragraph by Posner. Something tells me he needs an editor.

"In any event, there is no case at all from an overall social standpoint for subsidizing students who would pay full college tuition, without the inducement of a subsidy; the subsidy does not induce students to obtain a college education who otherwise would not because they could not afford to; it is a windfall to their families. Private colleges recognize this. They charge very high tuition (though not high enough to cover all their costs—but they have other sources of funds, such as alumni donations), but grant scholarships or loans to students whose families can’t afford the tuition. Charging low tuition to everyone, as public colleges do for residents of the state in which the college or university is located), does not make economic sense; it merely as I said provides windfalls to families willing and able to pay the full tuition. As Becker points out, this results in regressive redistribution of income, because families that can pay full tuition are wealthier than the average taxpayer, who pays for the costs of public colleges that tuition doesn’t cover".

If I've succeeded in hacking through this bramble bush, I take it that Posner thinks students with wealthy parents should pay higher tuition than students from more modest backgrounds (I'm making the general assumption that most students don't have independent sources of income or wealth). The reasoning behind this seems to be that Posner would view charging equal tuition to all students, regardless of financial background, to constitute a unnecessary "subsidy" to those who come from families that are better off. He further states that this would be a "regressive redistribution of income".

From a perspective of logic, I've got two problems with this. First, to the extent that public universities are financed through tax revenues (I take it this is what Posner refers to as a "state subsidy"), the it stands to reason that those from the wealthier families are, through taxes, disproportionately financing this "subsidy". In other words, their children are actually getting some benefit from the higher taxes those wealthy parents pay. I fail to see how this constitutes a "regressive re-distribution of income". (As an aside, this sort of sophistry sounds a bit how our social security system works: persons with higher incomes pay much more into the system thereby subsidizing the benefits of the less fortunate and, at the same time, that portion which those wealthy persons actually do get back in the form of benefits are more highly taxed). That's not to say that we should not have progressive taxation or premiums. It is to say that arguing getting at least a part of those progressive taxes back in the form of public services, like education, should not be labelled "regressive" as though the wealthy are actually stealing from the poor.

The second problem is that Posner makes the very significant assertion, in my view unsubstantiated, that the high tuition rates do not actually cover costs. What I suspect is actually happening in higher education, both public and private, is that those high tuition rates are set artificially high in order that the system can redistribute that high tuition from students from wealthy backgrounds to those from less wealthy backgrounds. This is a form of very significant income redistribution that has not been the subject of any serious public debate, has never been legislated as such by any elected body, and the control over which is limited to a very select few who set tuition rates and then have very broad discretion which is not subject to review to determine who obtains "discounts" to attend our public and private universities.

It's time all of this became much more transparent. Greater transparency and more equitable treatment would result if we funded our public universities through progressive income taxes and eliminated tuition for everyone who is academically qualified. As such, public universities would be financed disproportionately by those who earn the most and, as a result, their children would be entitled to the same tuition rate as everyone else--nothing.

Is it so clear that subsizing higher education of individuals who could and would borrow needed funds is not justified from an "overall social standpoint"? It seems to me worth considering the effects of graduating with very substantial debt on the choices of college graduates. Often education-related debt may be taken on by the parent generation, but often it is carried by the individual graduate. Setting aside questions about the fairness of who graduates with substantial debt and who graduates without it, I doubt that society consistently benefits from the pressure such debt creates on employment and other choices.

Posner's argument can, with a little effort, extend to all sorts of state-provided services that are taxpayer-financed, and could be financed by fees charged to those who need those services. If too few use the services because of the fees, then perhaps the services are not needed.

Vivian: Agreed, those paragraphs are convoluted, but he's dealing with a heap of variables so may be forgiven.

The discussion brings up a consideration of whether education is "current consumption" to be paid by parent and student at the time of the delivery of the service or an investment in the future to be shared by the student and the society that benefits from the student's higher values to herself and society.

K-12 is financed at the time of delivery, largely by those paying property taxes in the district be they young or older singles or those of large families.

College, by contrast, is largely paid now, but except for the relatively small subsidies by the individual student and parents.

We give strong lip service to an overall competitive benefit to our society were more to graduate college and a notch down the educational ladder were more to receive vocational education and become skilled craftsmen and employees in our huge service sector.

I've not seen a study, but nearly everyone believes that the GI Bill which allowed a broad range of ex-servicemen to attend college was a great investment and one that may well have helped to facilitate the booming economy of the 60's and 70's and paid for many "boomers" to attend college as well.

So what do we have here? Vivian's conclusion seems close to the mark:

"It's time all of this became much more transparent. Greater transparency and more equitable treatment would result if we funded our public universities through progressive income taxes and eliminated tuition for everyone who is academically qualified. As such, public universities would be financed disproportionately by those who earn the most and, as a result, their children would be entitled to the same tuition rate as everyone else--nothing."

Yes! Transparency, including finding out who pays for professors who no longer teach or have one token class while the student is presented with aides.

Two problems leap out, one is that of unserious kids partying for several years........ though grade standards and paying a bit should prevent too much abuse. The other is the problem of containing costs when "no one cares what they are" but it would seem those can be handled much as we handled K-12 budgets.

The positives for society as a whole seem much higher than the negatives. Surely we'd see a strong uptick in the number of students going to college. Apparently we graduate something like 25% today while the "new" jobs in our economy require something in the range of 75% college grads with many of those requiring post-graduate degrees.

What would happen if our society adopted a "paid by taxes" approach next week? First, today's families would be relieved of the burden of "saving for college" from kindergarten on, or the guilt of finding it impossible to do so. Also, economic waves such as today's or the market crash of a decade ago would not ruin the educational plans of so many families.

Instead the government would provide a voucher for most of the cost which is then paid back over time by taxes on the generation that benefits. Some grads will go into lower paid occupations such as K-12 teaching (where I'd argue their productivity is far higher than is their compensation) and perhaps have their educations somewhat subsidized by others, while others will gravitate to higher paid occupations or "invent" something and pay for the educations of many others.

Let's take one more look, down in that pocket of poverty, be it urban or rural, where a kid going to college has very high odds of being the first in his family to do so. A coach or mentor can say with honesty to a junior high student "Look, if you can get B's and C's through four years of HS you can go on to college and be what you want to be." A clear path w/o the "Yah sure.... and how am I going to get $50k plus?"

Gone are most of the "in state - out of state" Pell grant, student loan programs, etc. already being federalized. And gone is all the discussion, as above as to whether those who "can afford it" pay more, while SOME who qualify, get a different deal and so on.

I find it interesting that the cause of income inequality has been attributed to the slowing in educational attainment. The Race Between Education and Technology by Caludia Goldin and Lawrence Katz has been often cited for this explanation. Would not raising public university tuition create a downward cycle where those with less means have fewer opportunities to attain higher education, thus increasing income inequality? Goldin and Katz show how the American public education system in the beginning of the 20th century helped lead the US to greater prosperity and less income inequality that in Europe where education was accessable only to the affluent. Like the public secondary school system, public universities offer opportunities for educational attainment among the less affluent. This increases the supply of educated workers, increasing productivity and prosperity for a broader cohort than the just the wealthy. If states were to raise public university tuition without a comparable mechanism for enabling less affluent students to attend, then we could see a downward cycle for American prosperity.

This is an appalling piece. To think that the writer is a federal judge.

Let's start with the description of the problem. We have a shortage of highly educated people. Now is not the time to discourage people from a higher education. Now is the time to lower costs and educate people, giving them the higher skills they need for all of us to prosper.

In my state the shortage of skill workers is acute. 25 years ago we limited state taxes. As a consequence of adequate revenues our state university system as dropped from 40 to 115 nationally, due to prolonged inadequate funding. A direct result is that we only have about 20% college graduates whereas we need 40/45% of our population with a college education immediately. Talk about a need for "external benefits," we have such in spades. As a result of this storage, as factories have closed we have lot income, down about 17% - 18 % per family since Bush II became president.

Second, the evidence is overwhelming that the personal and social costs of students borrowing to pay for an education is horrible. On the one hand, students are discouraged because the risk of default from going to school. On the other hand, students facing repayment of debt will say or do anything once hired. No more unethical group of people exists than law school graduates from the judge's school, Harvard. Does the name Nancy Temple of Enron and Arthur Anderson ring a bell. She was the poster child of Judge Posner's world. Chicago U. + Harvard U. + debt = Arthur Andersen

The point which merits discussion is whether current funding tends to be regressive. I take it that Posner admits that trickle down doesn't work. If he were honest he would oppose trickle down everywhere. If trickle down does work, then so what. The wealthy grads wealth will trickle down. What's the problem?

I believe a wide range of solutions is necessary, starting with higher taxes on higher income on graduates. Those who profit from a publicly funded education should pay for it. Additionally, we look at a lot of other approaches assure that those who pay the taxes do benefit.

One approach I favor should have an invented here, make it here rule. If public funding results in research that results in an idea that has economic value, States ought to insist that the entire value stay in the state.

For example, the taxpayers in Ohio funded the research that lead to modern computer screens at Kent State. Ohio would be lot better off today if its required those ideas to have been incorporated into products made in Ohio.

Last, it is just total dishonesty to take U. Michigan and label what it has done as a positive trend. Necessity is the mother of invention, but not all ideas are good ones.

John: You've some interesting points. Not sure about tying tech to localities in a world where, for the most part, borders are falling.

"We have a shortage of highly educated people. Now is not the time to discourage people from a higher education. Now is the time to lower costs and educate people, giving them the higher skills they need for all of us to prosper."

Exactly! The more I consider the problem the more it seems a social contract of most of the college costs being spread over the society takes care of many of today's problems.

There would, in effect be automatic, minimum interest loans for those who had the HS grades, and kept up with college standards, and an automatic payback via taxes, replete with a lower cost for teachers and others who are likely paid less than they are worth and higher paybacks for those heading off to WS, sports field, or other venues where compensation is high and very likely higher than "worth".

As today's BA or BS is about what a HS diploma was in times past there's surely an argument for funding college in much the same manner as we have K-12, along with AA degrees and Voc Tech training.

Having the government as the lender would mean obtaining the service (eduction) first and paying for it over time much like housing and mortgages. The interest would be the very low rate of government borrowing, and the payback would be the surety of taxes rather than that of meeting bank payments. Further, the payback would not be stifling in one's early and lower paid years of buying a first home and trying to start a family, then a bit more in one's later, typically higher paid years.

As most of the college costs would be spread over society at large, those not availing themselves of the opportunity would be acting with some degree of economic irrationality. IF....... we really do believe that moving from 25% grads to something closer to the 50% bandied about, this would certainly help us move closer to that goal. My guess is that just as with the GI Bill our nation as a whole would reap countless benefits. I'm reminded of the bumper sticker proclaiming: "If you think education is expensive, try ignorance".

John...... I DO get your intent of reaping some benefit when tech is developed in a public institution in your state which would create incentives to do yet more, and hopefully some local jobs. Perhaps licensing, royalties, AND enforcement of intellectual property rights in ALL nations.

Take a look at this link and compare and contrast a real serious thinker about present economic problems and Becker/Posner

Before, I have written about China and our needing to really seriously re-think our economic and political models to compete.

http://ineteconomics.org/orville-schell

Becker/Posner are a real part of the problem. There are nothing but fronts for a select few in the country who are trying to steal everything before they turn out the lights.

You will never, ever see either give a positive idea how to make life better for 99.5% of Americans.

This discussion is an example. When we have a shortage of well educated people, this 800 pound elephant is disregarded and instead the problem is posted as unfairness because the current system might be regressive. The obvious solution to that is proposing fairer taxes, but you will never see these two people suggest paying for civilization, which is my Holmes was a far greater legal mind than Posner

His blood brothers in Texas are following his lead, cutting support for higher education:

Rep. Jim Pitts, who heads the budget-writing Appropriations Committee, said that while the initial blueprint cuts spending by nearly 17 percent, it’s simply “a starting point” and almost certainly will be changed before the session ends in late May.

Pitts, R-Waxahachie, conceded that the plan would cut by 69 percent the number of college students who receive Texas Grants, the main college scholarship program for youths from low- and moderate-income families. The program serves 87,000 students this year.

This is Posner hope, plan, and dream--screw young people from low and moderate income families. He wants a ruling aristocracy of the present rich.

John -- Indeed! What has happen to "economists" today? The "supply and demand" they trot out when the issue is that of compensating the "rare talents" of our WS thieves, incompetent banksters and those selling off the reputations of bond raters a century in establishing for personal gain, seems barely mentioned in essays referencing our need for MANY more college grads and skilled tradesmen and college costs that have doubled in just a few years.

IF...... we really believe our rhetoric of higher and better education being crucial to global competition surely we'd propose policies that would have the kick to move 25% to 40% or more........ including dealing with the underfunded K-12 schools of "those areas" (rural and urban) Higher tuitions and yet more complex patchworks of "aid" seem hardly the prescription.

"This is Posner hope, plan, and dream--screw young people from low and moderate income families. He wants a ruling aristocracy of the present rich."

.............. Well it won't work. As the ship settles more deeply in the water, while those in steerage may be first to go, soon those in the first class deck chairs will get wet as well.

Ha! Hard to mention "global competition" without noting that Big Pharma and indeed most of the medical field has been insulated. In my state of Alaska, we're gleefully selling oil that was developed when prices were $10-$20 and most of the costs long amortized, for $90 and still BP/Exxon are reluctant to do the "drill baby" dance since AK raised their owner's share a couple of percent. One would think a "world price" four times that of a decade ago and double what oil folk indicate it costs to develop most fields would have them scrambling. But, Ha! perhaps they're clever to be reluctant as what they don't supply today for $90 may well sell for $150 next year.

Hard to think of any commodities that are sold in massive volume for multiples of their production costs.......... and that have the effect of tanking some of the largest economies in the world.

Tans -- not sure if you're reading closely but John and I agree on so many issues it's not much of a "debate". I'd be delighted to hear how the world looks to those with vision. Perhaps you can tell us what you see? Thanks!

The overarching problem I see in both Posner and Becker's pieces is the notion that the cost of providing education is greater than the tuition and fees gathered.

Where are the supporting references for this factual assertion? If both public and private universities rid their balance sheets of the bloated benefits and salaries of tenured professors who do not teach wouldn't this offset the budget cuts. How about all the "research" time that is funded by universities that either have zero societal of educational benefit to the students? Let's cut these programs. How much time is actually spent teaching? Tenured university professors have it easy, with the vacation time, decreased time required to actually teach and extensive benefits.

The whole tenure system perverts incentives in higher education which leads to bloated and inefficient costs of delivering education.

Also, how about majors that really do not contribute to societal goals or the future financial and economic security of the students who major in them. We should cut these majors.

A smart policy would be to divest meaningless majors and endeavors and fund those who major in fields of the future.

Other thoughts, would be to eliminate general ed requirements that contribute to bloated graduation requirements and transcripts. Do these requirements really create better students or future employees, or rather create an artificial demand for less desired and needed classes and majors.

Also, shouldn't universities be challenged to engage in cost effective means of distributing education through the Internet. Why it the value-added of actually attending a live lecture as opposed to watching it streamed over the Internet. Shouldn't universities embrace these technologies and employ and on-demand payment system.

The only thing that should be free in our society is education, and GOOD education. Education should be open market and free, but paid for and subsidised by huge grants from the government, all the while with checks and balances in place. Can you imagine a world where every man and woman had a harvard education at their finger tips if they wanted it? The world would be a better place. I am sure of it. Do not charge for education!

Another study suggests that a modest improvement (from a current average of around 500 to 525) over 20 years in an international student assessment of 15-year-olds in the OECD nations — improvement in reading, math and science literacy — would mean a $115 trillion increase in these nations' aggregate GDP. Of that, $41 trillion would accrue to America.

McKinsey calculated that if American students matched those in Finland, America's economy would have been 9% to 16% larger in 2008 — between $1.3 trillion and $2.3 trillion. For now? "We go where the smart people are," says Howard High of Intel Corp. "Now our business operations are two-thirds in the United States and one-third overseas. But that ratio will flip over (in) the next 10 years."

This discussion ignores the fact that our great universities are first engines of research and creative expression, and only second institutions of education. We all benefit from these functions which must be supported by the public either in taxes or by philanthropy. The tenure system on the face of it seems unjustifiable. No other profession provides lifetime job security. But tenure allows an individual to focus deeply and for a prolonged period (decades or more) to become the penultimate expert on a topic. The private sector does not support the longterm development of such experts. Having experts provides enormous benefits to the society at large. Academic tenure is one of the most positive innovations of our society.

Oh, unsubstantiated statements. The Internet would be so boring without them.

So tuitions cannot cover college costs. Wow. To think that a single person knows the financial situation of every college in the USA, when no ordinary human being can even get close to know what his own college situation is, it's mind boggling.

No wonder Posner is a judge who talks about economy, politics and butterfly collections (I'm sure he must have written an article on the latter).

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I DO get your intent of reaping some benefit when tech is developed in a public institution in your state which would create incentives to do yet more, and hopefully some local jobs.Even with the increase , in Florida you have to pay 15% more tuition. thanks for bringing it to my attention..
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